What are “Best Efforts”?
Contracts sometimes require that a party use its “best efforts” to carry out its obligations. (This is in contrast to, for example, “commercially reasonable efforts”.) Last month, in California Pines Property Owners Assn. v. Pedotti, the California Court of Appeal for the Third District provided a definition of “best efforts”.
“Best Efforts” to Maintain a Full Reservoir
The case involved water diversion rights. Specifically, Pedotti was obligated to use “best efforts” to maintain a full reservoir. The court held [emphasis added]:
[W]hen a contract does not define the phrase “best efforts,” the promisor must use the diligence of a reasonable person under comparable circumstances. Diligence is certainly required, but the obligation is framed within the bounds of reasonableness.
Distinguishing Fiduciary Obligations and Good Faith
The court noted that best efforts do not establish a fiduciary obligation (an obligation to act primarily for the other party’s benefit).
The court also distinguished best efforts from the obligation of every party to an agreement to act in good faith, i.e., with honesty and fairness.
Given that the definition of best efforts refers to “a reasonable person” and “comparable circumstances”, I consider it likely that there is no practical difference between “best efforts” and “commercially reasonable efforts”, though I have not been able to find any California cases that discuss this point.
Take-away: The parties to an agreement are likely to have a better idea of their rights and obligations if the agreement identifies specific performance requirements rather than a general “best efforts” or “commercially reasonable efforts” obligation.
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Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
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